Digital currency Bitcoin linked to online drug bust

In this April 3, 2013 photo, Mike Caldwell, a 35-year-old software engineer, rolls a stack of bitcoin tokens at his shop in Sandy, Utah. With up to 70,000 transactions each day over the past month, bitcoins have been propelled from the world of Internet oddities to the cusp of mainstream use.

Federal authorities said Wednesday that they have arrested a San Francisco man accused of running an online marketplace for illegal drugs and other illicit goods.

Users of the Silk Road website made purchases using Bitcoin, a digital currency that helped mask their identity.

During the past four years, the value of bitcoins in circulation has exceeded $1 billion, and the currency is widely used around the world. The arrest of Silk Road's alleged founder, Ross William Ulbricht, and the shutdown of the site threw the market into disarray.

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The value of the virtual currency plummeted minutes after the FBI announced that it had shut down the site. Silk Road's closure means that users will lose any bitcoins they had deposited. That includes about $300 that the nonprofit Digital Citizens Alliance purchased as part of its own investigations of the industry.

"We just lost them; they're gone," said Adam Benson, the group's communications director.

The Silk Road case could be a blow to one of Bitcoin's greatest selling points: its reputation for secrecy, said Garth Bruen, president of the KnujOn spam-reporting service and a member of the DCA's advisory board. That reputation was central to Silk Road's ability to operate, and to Bitcoin itself, he said. But the federal investigation that led to Ulbricht's arrest shows that even purchases made with anonymous profiles on an anonymous site are still trackable, he said.

"This goes to show you that though this is an anonymous currency, if you use it for illegal purposes, you will get caught," Bruen said.

However, that crack in anonymity could turn out to be a positive thing for Bitcoin, he added, particularly among those who want to shed its reputation as the currency of choice for seedy online activities.

"This could be a way to say that Bitcoin is clean," Bruen said, "or it could dirty its reputation as a currency that just exists to do illegal, nasty stuff."

The FBI shuttered Silk Road and seized approximately 26,000 bitcoins worth about $3.6 million. It marks the largest bitcoin seizure in history, according to the complaint filed in the Southern District of New York.

"During its two and a half years in operation, Silk Road has been used by several thousand drug dealers and other unlawful vendors to distribute hundreds of kilograms of illegal drugs and other illicit goods and services to well over a hundred thousand buyers," the indictment states. It said that 600,000 bitcoins changed hands on the site, which at current exchange rates translates to about $1.2 billion.

In addition to narcotics, Silk Road listed fake driver's licenses, counterfeit currency, hacking services and much more, the government alleges.

Federal authorities identified Ulbricht, believed to be the person Silk Road users know as Dread Pirate Roberts, after a routine border search of a package that contained nine counterfeit IDs. The package was shipped from Canada to an address in San Francisco. When the government visited the San Francisco address, they found Ulbricht.

The complaint does not make clear why the authorities tracked the package.

The FBI then identified the primary Silk Road server and obtained an image of its hard drive in July, providing the federal government with a wealth of information about Silk Road's operations.

Authorities had also previously linked Ulbricht's personal email address to a Web post that appeared to be marketing Silk Road shortly after it launched, according to the indictment.

Attempts to identify or reach an attorney for Ulbricht were unsuccessful.

The indictment states that in the spring Ulbricht "solicited a murder-for-hire" of a Silk Road vendor attempting to extort him with a threat to release the identities of thousands of Silk Road users.

The alleged target, known as FriendlyChemist, sent Ulbright a series of messages beginning in March claiming that he had hacked into the computer of a large Silk Road vendor and obtained the names and addresses of sellers and customers. According to the complaint, FriendlyChemist threatened to publish the names online unless he was given $500,000.

According to the indictment, Ulbricht wrote to the alleged hit man: "In my eyes, FriendlyChemist is a liability and I wouldn't mind if he was executed. . . . I'm not sure how much you already know about this guy but I have the following info and am waiting on getting his address." He sent the hit man information about FriendlyChemist's location in Canada.

After FriendlyChemist sent another message saying he had "no choice" but to release the information within 72 hours, Ulbricht paid $150,000 to have him killed, according to the indictment. He paid in bitcoins.

However, the indictment said Canadian authorities have not been able to identify a homicide victim linked to this case.